In its simplest form, transportation is getting your shipment from Point A to Point B within a certain amount of time, using a set amount of space. The cost to transport finished goods from the plant through the warehouse facilities and, finally, to the customer continues to be the largest single logistics expense for most companies, averaging 63% of the company's total logistics cost. Transportation commerce is the business of buying and selling transportation services.
Unfortunately, most companies still rely on the outmoded National Motor Freight Classification (NMFC) schema established in 1936. This method allocates the cost of using the space and/or weight resources the carrier is supplying to the shipper.
The National Motor Freight Classification has outlived its key use (borrowed from the railroad's Uniform Freight Classification (UFC) of creating a "simplified" table of classes to which a rate can be assigned). This clone is the basis for pricing transportation commerce for shipments from 150 lbs to less than 20,000 lbs., which are classified as Less-Than-Truckload (LTL). It is the authors' opinion that this approach for pricing and structuring LTL transportation commerce is based on a dogma that is an accepted industry practice, but is actually archaic for today's businesses.
However, the outmoded pricing schema is only one part of the problem. Industry experts suggest that the industry is likely on the verge of shifting pricing power from the shipper to carriers among all modes of transportation. The recession has forced a considerable rationalization of enterprises, assets and cost structure, which leaves fewer, but considerably stronger major LTL carriers in the marketplace.
Currently, 85.5% of the total LTL market is controlled by the top 25 LTL carriers, with 98.5% controlled by the top 50 LTL carriers. Typically, the shipper community, including third-party logistics providers (3PLs) and other Logistics Service Providers (LSPs), is ill prepared to cope with this shift in the economic strength and pricing power of its LTL carriers.
But more than just money is at stake when it comes to transportation. Customer service and a company's reputation, for example, are both greatly affected by the ability to get goods to the market in a reliable, timely, and more efficient manner.
The University of Tennessee teamed with thought-leading practitioners from Transolve and Supply Chain Visions to develop this white paper. The team felt strongly that the industry needed to challeng conventional thinking in how companies approach transportation commerce if organizations are to be successful in the future. Our attention is drawn to the LTL segment due to the complex, overbearing and serious inefficiencies in common practice today. The Vested Transportation principles outlined in the last section of this white paper may be applied to all modes of transportation.
This paper is divided into four main parts.
1. We first set the stage that the industry is at potential tipping point — where some will hunker
down and try to preserve the old school ways, while others will take the leap to find alternative
ways to manage transportation commerce.
2. Next we explain the dogma associated with the most widely-used LTL pricing methodology —
class-rate pricing. We do this in an effort to educate practitioners of the basics of transportation
pricing and show that class-rate pricing has outlived its purpose.
3. We then demonstrate that old-school class-rate pricing is flawed, providing real-world examples
of "dilemmas" — a perfect storm that is upon us now for both shippers and carriers.
4. We then introduce the concept of Vested Outsourcing: a break-through approach the authors
believe will transform how companies approach transportation commerce.
5. Lastly, we introduce the concept of Vested TransportationTM, where we strive to lay a roadmap
for companies to apply the Vested Outsourcing rules to the unique business needs of the
transportation industry. We provide examples how application of Vested concepts can create
substantial improvements in the area of transportation commerce with real benefits in terms
of pricing for the shipper and cost reduction for the carrier.
Unfortunately, most companies still rely on the outmoded National Motor Freight Classification (NMFC) schema established in 1936. This method allocates the cost of using the space and/or weight resources the carrier is supplying to the shipper.
The National Motor Freight Classification has outlived its key use (borrowed from the railroad's Uniform Freight Classification (UFC) of creating a "simplified" table of classes to which a rate can be assigned). This clone is the basis for pricing transportation commerce for shipments from 150 lbs to less than 20,000 lbs., which are classified as Less-Than-Truckload (LTL). It is the authors' opinion that this approach for pricing and structuring LTL transportation commerce is based on a dogma that is an accepted industry practice, but is actually archaic for today's businesses.
However, the outmoded pricing schema is only one part of the problem. Industry experts suggest that the industry is likely on the verge of shifting pricing power from the shipper to carriers among all modes of transportation. The recession has forced a considerable rationalization of enterprises, assets and cost structure, which leaves fewer, but considerably stronger major LTL carriers in the marketplace.
Currently, 85.5% of the total LTL market is controlled by the top 25 LTL carriers, with 98.5% controlled by the top 50 LTL carriers. Typically, the shipper community, including third-party logistics providers (3PLs) and other Logistics Service Providers (LSPs), is ill prepared to cope with this shift in the economic strength and pricing power of its LTL carriers.
But more than just money is at stake when it comes to transportation. Customer service and a company's reputation, for example, are both greatly affected by the ability to get goods to the market in a reliable, timely, and more efficient manner.
The University of Tennessee teamed with thought-leading practitioners from Transolve and Supply Chain Visions to develop this white paper. The team felt strongly that the industry needed to challeng conventional thinking in how companies approach transportation commerce if organizations are to be successful in the future. Our attention is drawn to the LTL segment due to the complex, overbearing and serious inefficiencies in common practice today. The Vested Transportation principles outlined in the last section of this white paper may be applied to all modes of transportation.
This paper is divided into four main parts.
1. We first set the stage that the industry is at potential tipping point — where some will hunker
down and try to preserve the old school ways, while others will take the leap to find alternative
ways to manage transportation commerce.
2. Next we explain the dogma associated with the most widely-used LTL pricing methodology —
class-rate pricing. We do this in an effort to educate practitioners of the basics of transportation
pricing and show that class-rate pricing has outlived its purpose.
3. We then demonstrate that old-school class-rate pricing is flawed, providing real-world examples
of "dilemmas" — a perfect storm that is upon us now for both shippers and carriers.
4. We then introduce the concept of Vested Outsourcing: a break-through approach the authors
believe will transform how companies approach transportation commerce.
5. Lastly, we introduce the concept of Vested TransportationTM, where we strive to lay a roadmap
for companies to apply the Vested Outsourcing rules to the unique business needs of the
transportation industry. We provide examples how application of Vested concepts can create
substantial improvements in the area of transportation commerce with real benefits in terms
of pricing for the shipper and cost reduction for the carrier.
